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FreeAgent recently partnered with HMRC as part of the Making Tax Digital (MTD) pilot to gain insight into the experiences of small businesses making the switch to digital tax software. Over two months our user experience (UX) team closely monitored 47 small businesses and freelancers from a variety of trades as they trialled using FreeAgent’s accounting software to manage their finances. Here’s what we found out:

1. Small businesses are hopeful that Making Tax Digital will relieve tax stress

HMRC has claimed that using digital tax software to make regular submissions will not only give participants clarity over their tax position, but will also encourage better accounting habits. We found that many of the research project’s participants were hopeful that this would be true.

In a survey conducted at the beginning of the project, before the participants had started using our accounting software, there was a split in attitudes about the potential impact Making Tax Digital would have on their business. 31% of participants who replied thought it would make running their business easier, whereas 28% thought it would make running their business harder.

However, in the same survey, many of the participants said that they wanted MTD to make managing their tax easier:

“I hope it will make tax returns less onerous by working on things as I go rather than at the end of the year.” – Survey answer

“Curious to see if it saves time in the long run and hope to see how well or otherwise the business is doing as the year progresses rather than waiting for the year end.” – Survey answer

On the other hand, there were concerns about what the administrative burden that submitting regular financial updates to HMRC would mean:

“Self Assessment takes quite a long time, if like me you do it once a year then it takes a while to remember what you have to do and to make sure you are filling it all out correctly and don’t make any mistakes. So, if you multiply that by four then it takes quite a lot of time to do it.” – Survey answer

The last point in this answer is related to ‘quarterly tax returns’: a popular label for Making Tax Digital based on the belief that MTD tax submissions will be equivalent to four tax returns per year. In our guide Mistaking Tax Digital: 13 myths busted we have gone some way to clearing up this issue, however, until HMRC provides greater clarity the issue of quarterly submissions will remain a source of anxiety; which leads us to our next finding.

2. The lack of official information from HMRC is causing concern

Throughout the project it became clear that many participants were becoming agitated by the lack of information coming from HMRC. In particular, participants were concerned about when MTD would happen, whether or not free accounting software would become available and how often payments would need to be made.

When asked at the end of the trial what their main concern about Making Tax Digital was, many responded with concerns about the quality and clarity of MTD guidance coming from HMRC:

“I think the risk is that it [MTD] will be made to look so complicated. To take me as an example, I freelance but mainly for one company. I have few if any outgoings, so it will take me a few moments to assemble the figures. By making it sound like a big thing, HMRC are scaring people who don't need to be scared.” - Survey answer

“The lack of ANY clear information about what HMRC is expecting in the way of data that they can access.” – Survey answer

With these concerns in mind, and while we wait for further information from HMRC, we’ve created a simple guide to Making Tax Digital that explains how the initiative will impact your business and what you can do to prepare.

3. There is uncertainty about how much transitioning to Making Tax Digital software will cost small businesses

Shortly after HMRC released this figure, Lord Hollick, chairman of the of House of Lords Economic Affairs, Committee stated that MTD costs were “disbelieved” by small businesses and our research project also finds this to be the case. Both accountants and participants who use the services of a professional accountant are afraid that their costs will significantly increase.

Another concern exists among smaller businesses who don’t feel they require the complexity of a digital accounting system. The majority of participants in our research project (69%) felt that the simplicity of their accounts meant that they didn’t require the services of an accountant or accounting software:

“I’m not using an accountant because I’m such a small business and have a small turnover, so I don’t have to pay anything at the moment. It only costs me my time to do it.” – Survey answer

“I’m worried about the cost of the package since submitting tax returns costs me nothing at present.” – Survey answer

One of the accountants involved in the research echoed concerns about increased costs:

“A lot of my clients won’t do this themselves, they’ll want me to do it and this means it’s going to cost them, so their bill from me is suddenly going to skyrocket.” – Survey answer

Although in the minority, the voices that were resistant to Making Tax Digital in our research project were mainly motivated by concerns about the financial impact on their business. While the true cost of Making Tax Digital can’t accurately be calculated until there is clear information about what HMRC expects from small businesses, the uncertainty continues to be a source of unrest.

From research that we conducted before the MTD beta project, we found that making the switch to FreeAgent’s digital accounting software from spreadsheets saves businesses an average of one day a month. The simplicity of using software and the better bookkeeping habits that software encourages has often been left out of the discussions around cost and value for money.

4. Using digital tax software gets easier

Although none of the participants in the research project had previously used accounting software, there was evidence of an appetite to get to grips with FreeAgent’s features in preparation for the new era of digital tax reporting. One user said:

“I want to be confident and ready if HMRC do go to a digital system.” – Survey answer

As mentioned above, a few participants with simple business structures felt that FreeAgent was too complex for their needs. However, as the research progressed it became clear that many users were overcoming the barriers of learning a new accounting system and had increased their confidence of using FreeAgent by the end of the trial. As well as showing an ability to find answers to their questions independently using FreeAgent’s Knowledge Base videos and articles, several also had a positive experience of interacting with our support team.

25% of respondents to the final survey on progress throughout the project had found that using FreeAgent’s accounting software had helped them with running their business.

What's next for MTD

The main source of anxiety in the research group was the uncertainty about the details of HMRC’s Making Tax Digital plan, particularly about the cost of switching to accounting software. We have recommended that HMRC provides more information and clear guidance on the requirements and impact MTD will have on business, and support them in understanding how they can work with an accountant to mitigate their costs.

At FreeAgent we will continue to provide small businesses, freelancers and their accountants with resources that help them to get the most out of using software to manage their finances.